Sept 9 (Reuters) - Sterling gained against the dollar and the euro on Tuesday as traders slightly raised the odds of an outsized rate cut by the Federal Reserve next week while political developments in France weighed on the euro.
Sterling was up 0.3% at $1.3585, hovering near its strongest level since mid-August.
Investors are awaiting U.S. job revisions data due later in the day which could point to the jobs market in worse shape than initially thought, shoring up the case for even deeper Federal Reserve interest rate cuts.
"Markets are positioning for next week’s Federal Open Market Committee (FOMC) and Bank of England meetings, where the Fed will likely signal more cuts this year and the BOE will likely hint at delaying cuts to 2026," Philip Wee, senior FX strategist at DBS, said in a note.
Money markets have fully priced in a 25-basis point cut by the Fed but an uptick on the odds of an outsized 50-basis point cut weighed on the dollar and pushed it down to a near seven-week low against a basket of major peers on Tuesday. The dollar index was last down 0.1% at 97.26.
The euro, meanwhile, slipped 0.2% against sterling to 0.8662.
The ouster of French Prime Minister Francois Bayrou on Monday kept the euro on the defensive even as analysts say the developments are not sufficient to trigger a fall in the common currency.
Looking ahead, though, analysts reckon that sterling could remain sensitive to fiscal developments in the UK, worries over which have cooled since long-dated gilt yields climbed to their highest levels since 1998 last week.
Sterling is likely to be "particularly susceptible to jitters at the long end of the curve", said Jane Foley, head of FX strategy at Rabobank.
British finance minister Rachel Reeves is scheduled to announce the budget on November 26.
Reporting by Jaspreet Kalra; Editing by Emelia Sithole-Matarise
Source: Reuters